Tarves v. R., [1997] 2 CTC 2439

Bell T.CJ.:

The issue in this appeal is whether the Appellant, in respect of his 1983 taxation year, was carrying on a business as a result of having entered into arrangements by virtue of which he obtained the right to sell “Speed Read” courses in an area of the U.S.A. and claimed a deduction of “advance royalties” for that area.

This is one of several hundred cases in which the facts, as outlined by the Appellant, and as admitted in the Reply to the Notice of Appeal, are substantially the same as those outlined in detail in Bendall v. R., (1995), 96 D.T.C. 1626 (T.C.C.).

Shortly stated, Applied Research Ltd., (“Applied”) a Grand Cayman Island company, owned the copyright to a self-taught course of instruction in speed reading. This company was associated with H.N. Thill & Associates Inc. (“Thill”) which promoted the sale to Canadians of licenses to sell the course in specified territories in the U.S.A.. For each territory, the Appellant licensee agreed to pay a license fee of $100 and an “advance royalty” of $20,000. Another related company, Omni Educational Marketing Corp. (“Omni”), held itself out to be prepared to market the courses on behalf of the licensees. Omni offered each licensee a cash performance bond of $17,500 in support of its promise to market the courses. The Appellant purchased the rights in respect of one area. With respect to that territory, the cash bond payment to the Appellant was made and was used by him as part payment of the $20,100 payable to Applied. The Appellant deducted $20,000 as “ROYALTIES” in his 1983 income tax return which was prepared by Thill. He paid the sum of $100 but did not pay the sum of $2,500 in respect of the contract. He received no refund and has instituted this appeal claiming same.

The Appellant filed as an exhibit a brochure entitled “INTRODUCING THE ADVANCED READING PROGRAM”. This nine page document outlines the nature of the program, advertising strategies, marketing strategies, sales forecasts and financing. It is a document which, combined with the Appellant’s intelligence and sincerity as perceived by me, could reasonably be interpreted as persuading a potential investor about the legitimacy and prospects of the undertaking. He testified that he relied on this, on the fact that he thought the product was good and on what he had learned at meetings he attended.

The Appellant also filed a copy of the “PERFORMANCE BOND CONDITIONS”, “LICENSE AGREEMENT” and “STANDARD OPERATING AGREEMENT”. These provided that Applied Research Ltd. (“Applied”) granted to the Appellant an exclusive license respecting the marketing and distribution of the advanced reading course in a specified geographical area. This required payment of the aforesaid license fee of $100 and the amount of $20,000 as advance royalties for the rights. The royalties amount was computed on the basis of a royalty of $20 per course on a distribution of $1,000 courses for the first year. The agreement also required the payment of a $20 royalty on each course published, taught or reproduced in any manner for the remaining 20 year term of the agreement.

The PERFORMANCE BOND CONDITIONS document provided that Omni Educational Marketing Corp. (“Omni”), a company related to Applied, grant a cash bond of $17,500 to guarantee minimum performance under the operating agreement. As set out above, it was offset against the $20,000 obligation.

The Appellant was 23 years of age in 1983 when he became aware of the potential of marketing these courses. He attended seminars and discussed the potential with various persons. I have no doubt about his sincerity and about his intelligence and integrity. Although I am satisfied about his earnest quest for business income through this venture, it is clear that he had no intention of marketing these courses personally and it is equally clear that Omni, as stated in the Reply to the Notice of Appeal, had no marketing program and had no employees to carry out a marketing and distributing business.

I agree with Respondent’s counsel’s submission that the reasoning of the Federal Court of Appeal in Tonn v. R., (1995), [1996] 2 F.C. 73 (Fed. C.A.) that the primary use of the objective test as to whether a business has a reasonable expectation of profit is the prevention of inappropriate reductions in tax and is not intended as a vehicle for the wholesale judicial second guessing of business judgment. I agree with the Court’s finding that this test should be applied sparingly where a taxpayer’s “business judgment” is involved, where no personal element is in evidence, and where the extent of the deductions claimed are not on their face questionable. His submission continued to the effect that where circumstances suggest that a personal or other-than-business motivation existed, [1] or where the expectation of profit was so unreasonable as to raise a suspicion, the taxpayer would be called upon to justify objectively that the operation was in fact a business. As per Iacobucci J. in Symes v. R., (1993), 94 D.T.C. 6001 (S.C.C.), at 601:

As in other areas of law where purpose or intentions behind actions is to be ascertained, it must not be supposed that, in responding to this question, courts will be guided only by a taxpayer’s statements, ex post facto, or otherwise, as to the subjective purpose of that particular expenditure. Courts will, instead, look for objective manifestations of purpose, and purpose is ultimately a question of fact to be decided with due regard for all of the circumstances.

Unfortunately, in spite of the Appellant’s earnest quest for what he believed to be business profit, an overall assessment of the circumstances including the failure of Omni to produce sales and, therefore, income, persuades me to agree with the decisions in Moloney v. R., 89 D.T.C. 5099 (Fed. T.D.) (affirmed by the Federal Court of Appeal 92 D.T.C. 6570 (Fed. T.D.)) and in Michael Bendall v. Her Majesty the Queen (supra).

Accordingly, the appeal is dismissed.

Appeal dismissed.